French debt downgraded as Troika praises Portuguese reforms

France has been stripped of its triple-A credit rating due to structural problems, a poor fiscal outlook and heightened uncertainty over the country's resilience to shocks. Meanwhile, Portugal  has been praised by the International Monetary Fund (IMF), European Commission (EC) and European Central Bank (ECB) for making "solid progress" with reforms.

Credit rating agency Moody's downgraded France's debt rating one notch to Aa1, with a negative outlook, citing three principal reasons for the decision: the fact it is suffering from a "gradual, sustained loss of competitiveness"; a fiscal deficit that was being exacerbated by the weak economic outlook; and a vulnerability to shocks from within the eurozone.

The report by Moody's Investors Service said one source of these vulnerabilities was France's lack of access to national central bank funding in the event of a market disruption. Furthermore, it highlighted the risk emergency funds from the European Stability Mechanism might not be available at the time they are needed.

"In case of need, France – like other large and highly rated euro area member states – may not benefit from these support mechanisms to the same extent, given that these resources might have already been exhausted," the agency said.

The downgrade follows that of Standard & Poor's, which cut France's rating one notch to AA+ with a negative outlook in January this year. The latest downgrade means two of the three main agencies rate French debt at less than AAA.

Markets gave a muted response to the announcement. French government bond yields rose by 4 basis points to 2.13%, while stock markets halted a previous rise but only fell slightly – the CAC 40 index in France was down 0.06%, while the UK's FTSE 100 index fell 0.16%.

Portugal, rated Ba3 by Moody's, received more positive comments from a statement by the ‘Troika' of ECB, EC and IMF following a sixth review mission. The Troika said Portugal was making good progress towards meeting programme commitments. "External and fiscal adjustment continues to advance, adequate capital and liquidity buffers have reduced financial stability risks, and structural reforms are proceeding apace," the Troika said.

The government is now expected to meet deficit targets for 2012, after the maximum deficit was raised from 4.5% to 5% in 2012 and 3% to 4.5% in 2013, following the fifth programme review. Lower than expected revenue collection was offset by "tight spending execution", the statement said.

The Troika said the adjusted programme represented a suitable compromise between austerity and growth, which was expected to return to positive quarterly rates during 2013. "Given financing constraints and high debts, the programme adequately balances the need to adjust, against the unavoidable costs of adjustment for economic activity and jobs," the statement said.